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Analysis Of Cement Industries Finance Essay

The main purpose of study is evaluating the performance of cement industries in Pakistan. There are four cement industries and analysis industries performance for the years 2007-2010. Data collect from the financial statement for each year.

The performances of cement industries calculate through used accounting ratio. In literature the use of accounting ratio is common (international business research.2008; M.suyanto 2000-2004) and (Muhammad shehzad Moin, 2008).Moreover, accounting ratio could remove gap size of industries. In this chapter uses 12 financial ratios for measuring cement industries performance. These ratios can be categories into four groups according to their performance.

Monitory administration theories offer different indexes for measuring industries performance, one of them is accounting ratio. The study purpose to comparison cement industries. The full fledge cement industries are as follow.

Generally, accounting profits are the difference between revenues and costs. Profitability is considered to be the most difficult attributes of a firm to conceptualize and to measure. These ratios are used to assess the ability of the business to generate earnings in comparison with its all expenses and other relevant costs during a specific time period. More specifically, these ratios indicate firm’s profitability after taking account of all expenses and income taxes, the efficiency of operations, firm pricing policies, profitability on assets and to shareholders of the firm. Profitability ratios are generally considered to be the basic bank financial ratio in order to evaluate how well cement industry is performing in terms of profit. For the most part, if a profitability ratio is relatively higher as compared to the competitor(s), industry averages, guidelines, or previous years’ same ratios, then it is taken as indicator of better performance of the cement industry. Study applies these criteria to judge the profitability of the cement industry: Return on assets (ROA), Return on Equity (ROE), and Profit Expense Ratio (PER).

Return on Assets (ROA)

Profit after Tax / Total Assets

Return on assets indicates the profitability on the assets of the firm after all expenses and taxes. It is a common measure of managerial performance .It measures how much the firm is earning after tax for each dollar invested in the assets of the firm. That is, it measures net earnings per unit of a given asset, moreover, how cement industry can convert its assets into earnings (Samad & Hassan2000). Generally, a higher ratio means better managerial performance and efficient utilization of the assets of the firm and lower ratio is the indicator of inefficient use of assets. ROA can be increased by firms either by increasing profit margins or asset turnover but they can’t do it simultaneously because of competition and trade-off between turnover and margin. ROA is calculated as und

Return on Assets (ROA) is an indicator which tells about the efficiency of firm in using the assets. It is calculated by dividing the annual earning of the company with total assets, shown as percentage.

Return on Assets

2007

2008

2009

2010

Mean

Attock Cement Ltd

13.76%

7.41%

21.4%

14.4%

 

Maple Leaf Cement Ltd

0.18%

-2.98%

-3.83%

-9.9%

 

Fauji cement

10.1%

3.32%

4.69%

.93%

Lucky Cement Ltd

9.9%

7.8%

11.9%

8.2%

The end result show several important points of comparison of ROA between cement industries. First, ROA of Attock cement has been greater performance on ROA, all cement factories except Maple cement shows negative performance and ROA negatively. Maple cement shows decreasing trend ROA from .18% in 2007 to -9.9% in 2010 it can improving their performance, however Fuji cement Limited shows negatively performance trend from 10.1%%in 2007 to -.93% in 2010,Lucky cement ROA performance at the started period is positive trend 9.9% in 2007 to 7.8% in 2008 but in 2009 they will be increce 11.9% but in 2010 it shows negative results -0.32% and -0.96%.

Return on Equity (ROE)

Profit after Tax / Equity

Return on equity indicates the profitability to shareholders of the firm after all expenses and taxes. It measures how much the firm is earning after tax for each dollar invested in the firm. In other words, ROE is net earnings per dollar equity capital. (Samad & Hassan 2000). It is also an indicator of measuring managerial efficiency (Hassan (1999), and Samad (1998). By and large, higher ROE means better managerial performance; however, a higher return on equity may be due to debt (financial leverage) or higher return on assets. Financial leverage creates an important difference between ROA and ROE in that financial leverage always magnifies ROE. This will always be the case as long as the ROA (gross) is greater the interest rate on debt .usually, there is higher ROE for high growth companies

Return on Equity

2007

2008

2009

2010

Mean

Atctok Cement Ltd

23.5%

12.3%

10.3%

18.8%

%

Maple Leaf Cement Ltd

0.46%

-8.1%

-14.63%

-62.5%

%

Fauji cement

17.3%

4.46%

10.39%

2.6%

%

Lucky Cement Ltd

27.2%

14.35%

19.77%

12.5%

%

Similar to ROA, from the study of ROE ofcement industries, we emphasize some important points to judge. The result shows that ATTock factory ROE is consistently higher than othercement fectory. In year 2007, the Attock fectory and Maple fectory huge difference was ROE DIB shows negatively performance and negatively profitability and more risky, however the Attock ROE shows profitability and better managerial performance but in 20010 both fectories positively performance. TheMaple ROE from .16% in 2007, which has plummeted to -62.4% in 2010.Fuji cement shows downward trend ROE, negatively performance and more risky low managerial performance from 17.3% in2007 to 2.6.% in 2010. Lucky shows better performance in years 2007 to 2009 these two year cement fectory profitable and 17.3% growth for compare with 2007 but in 2009 and 2010 downward trend bank shows lose 19.77% to 12.5% Lucky cement goes to more risky,

PROFIT TO EXPENSES (PER)

Profit after Tax / Operating Expenses

It measures the operating profitability of the cement industry with regards to its total operating expenses. In our study, operating profit is defined as earnings before taxes and operating expenses means total non-interest expenses. The ratio measures the amount of operating profit earned for each dollar of operating expense. The ratio indicates to what extent cement industry is efficient in controlling its operating expenses. A higher PER means bank is cost efficient and is making higher profits (Samad & Hassan 2000).

Profit to Expenses

2007

2008

2009

2010

Mean

Atctok Cement Ltd

9

7.9

10

9.8

Maple Leaf Cement Ltd

2.2

-27.2

-23.3

-16.3

Fauji cement

11.12

12.06

12.9

9.82

Lucky Cement Ltd

17.9

4.2

5.6

12.2

Another measure of profitability, PER, is supporting the fauji Cement to be more profitable in terms of expenses as compared to the other Cement factory over the time period of 2007-2010. The analysis of PER of Cement factory indicates that Fauji Cement have generated consistently higher profits for every one rupee of expense spent during 2007-2010, but as compared from 11.12 in 2007 to shows increasing trend 12.06 in 2008 and 12.09 in 2009, but again it decreasing trend in 2010 . Maple Leaf Cement shows lose and negative performance in 2008 after period it shows up ward trend but also negative performance in 2010, Atctok Cement Ltd shows the ratio in 2007 9time and it increase ratio in 2010. Lucky Cement indicate profit earning per dollar increase in 2007 but in 2008 – 2009 downward performance and shows more expenses and it also increase ing trend in 2010

6.2 LIQUIDITY RATIO

Liquidity ratios indicate the ability of the firm to meet recurring financial obligations. Liquidity is important for the firm to avoid defaulting on its financial obligations and, thus, to avoid experiencing financial distress. These ratios measure ability of the firm to meet its short term obligations, maintain cash position, and collect receivables. In general sense, the higher liquidity ratios mean cement industry has larger margin of safety and ability to cover its short term obligations. Because saving accounts and transaction deposits can be withdrawn at any time, there is high liquidity risk for both the banks and other depository institutions. cement industry can get into liquidity problem especially when withdrawals exceed new deposit significantly over a short period of time (Samad & Hassan 2000). Measures of liquidity are: Loan to Deposit Ratio (LDR), Cash to Deposit Ratio (CD), and Loan to Asset Ratio (LAR).

Loan to Asset Ratio (LAR)

Loan / Deposits

Loan to deposit is the most important ratio to measure the liquidity condition of the cement industry. Here, loan means the advances for the conventional cement industry and financings for the cement industry. Because cement industry are prohibited to extend loans and earn interest (Riba) and restricted to follow cement industry Principles while conducting their industry business operations so the only way the cement industry can utilize their deposits is to provide financings through different cement industry financial products. cement industry with Low LDR is considered to have excessive liquidity, potentially lower profits, and hence less risk as compared to the bank with high LDR. However, high LDR indicates that a cement industry has taken more financial stress by making excessive loans and also shows risk that to meet depositors’ claims cement industry may have to sell some loans at loss.

Loan to total Assets

2007

2008

2009

2010

Mean

Atctok Cement Ltd

23.8%

23%

1.5%

5.64%

Maple Leaf Cement Ltd

36.6%

0.92%

3.22%

4.21%

Fauji cement

13.67%

2.61%

29%

4.45%

Lucky Cement Ltd

32.4%

19.4%

11.2%

4.33%

Whereas loan to asset ratio shows somewhat different results. Figure shows that LAR of Atctok Cement Ltd is decreasing trend whereas LAR maple leaf and fauji cement Pakistan Limited is on decreasing trend, lucky cement is also shows decreasing trend in 2007 (32.4%) to 2010 (4.33%). However Attock and Maple leaf cement Limited shows decreasing trend from 2007 (23.8%) and (36.6%) to 2008 (23%) and (0.92%) but in 2009 (5.64%) and (4.21%) downward trend shows. The increasing trend of Attock, Maple leaf, fauji and lucky cement LAR is clear evidence of more financial stress which Cement industries are taking by making excessive loans and holding less liquid assets. This is an indication of potential betterment in profitability and also conforms to our results drawn from profitability ratios of Cement industries..

Overall results of all liquidity measures show that Cement industries are similar to each other except in terms of CPIDBR in which attock Cement is found to be more liquid than other cement factories.

6.3 RISK AND SOLVANCY RATIO

This is a class of ratios that measures the risk and solvency of the firm. These ratios are also referred to as gearing, debt or financial leverage ratios. These ratios determine the probability that the firm default on its debt contacts. The firm has additional debt a higher is the possibility that firm will become powerless to complete its contractual liabilities. In other words, higher levels of debt can lead to higher probability of bankruptcy and financial distress. Although, debt is an important form of financing that provided significant tax advantage, it may create conflict of interest between the creditors and the shareholders. If the amount of assets is greater than amount of its all types of liabilities, the bank is considered to be solvent. “Deposits” constitute major liability for any type of bank whether Islamic or conventional. Borrowed money in either form stands second among total liabilities for almost all banks except all Islamic banks which are prohibited from taking or giving any kind of interest-based debts. To measure risk and solvency of the cement industry, measures usually used are: Debt-Equity Ratio (DER), Debt to Total Assets Ratio (DTAR), and Equity Multiplier (EM).

Debt to Equity Ratio (DER)

Debt / Equity

It is one of the tools to measure the extent to which firm uses debt. It measures ability of the cement industry capital to absorb financial shocks. In case, creditors default in paying back their loans or the asset values decrease cement industry capital provides shield against those loan losses. A cement industry with lower DER is considered better as compared to the cement industry with higher DER.

.

Debt to Equity

2006

2007

2008

2009

Mean

Atctok Cement Ltd

0.41

0.38

0.02

0.07

Maple Leaf Cement Ltd

0.95

0.03

0.12

0.26

Fauji cement

0.23

0.04

0.6

1.24

Lucky Cement Ltd

0.89

0.36

0.18

0.07

Debt to equity ratio of fauji Cement increased to 1.24 times in 2010 from 0.23 times in 2007 showing an overall increasing trend as compared to lucky Cement decreased to 0.07 times in 2010 from 0.89 times in 2007, attock Cement Pakistan Limited decreased 0.41 times in 2007 to 0.07 times in 2010 , however, Maple Leaf shows decreasing trend 0.95 times in 2007,0.03 times in 2008 , 0.26 times in 2010 . These results show that Lucky and attock Cement are more risky as compared toFauji and Maple Leaf

Equity Multiplier (EM)

Total Assets / Equity

How many times the total assets are of the shareholders’ equity is measure by equity multiplier. In other words, it indicates the amount of assets per dollar of shareholders’ equity. Higher value of EM means that cement industry has used more debt to convert into assets with share capital. Generally, the higher is the EM the greater is the risk for a industry

Equity Multiplier

2007

2008

2009

2010

Mean

Atctok Cement Ltd

1.7

1.66

1.46

1.31

Maple Leaf Cement Ltd

2.61

0.32

0.26

0.11

Fauji cement

1.7

1.3

2.2

2.7

Lucky Cement Ltd

2.75

1.84

1.65

1.53

The analysis of another measure of risk, equity multiplier, and higher value of EM means that Cement factory has used more debt to convert into assets with share capital. Generally, the higher is the EM the greater is the risk for a Cement industries. The Maple Leaf to be more risky and less solvent as compared to other Cement industries. EM of Fauji Cement increased to 2.7 times in 2010 from 1.7 times in 2007, Lucky Cement shows EM decreased 1.53 times in 2010 from 2.75 in 2007, Allock Cement shows result EM dccreased from 1.31 times in 2010 from 1.7 times in 2007 .The difference between the means is statistically significant at 5% significance level.

6.4 EFFICIENCY RATIO

These ratios measure how effectively and efficiently the firm is managing and controlling its assets. These ratios indicate the overall effectiveness of the firm in utilizing its assets to generate sales, quality of receivables and how successful the firm is in its collections, the promptness of payment to suppliers by the firm, effectiveness of the inventory management practices, and efficiency of firm in controlling its expenses. Higher value of these ratios is taken as good indicator which means firm is doing well. Ratios used to measure efficiency of the bank are: Asset Utilization (AU), Income to Expense Ratio (IER), and Operating efficiency (OE).

Asset Utilization (AU)

Total Income / Total Assets

How effectively the cement industry is utilizing all of its assets is measured by assets utilization ratio. The cement industry is presumably said to using its assets effectively in generating total revenues if the AU ratio is high. If the ratio of AU is low, the industry is not using its assets to their capacity and should either increase total revenues or dispose of some of the assets. Total revenue of the industry in this study is defined as net spread before provision plus all other income.

Assets Utilization

2007

2008

2009

2010

Mean

Atctok Cement Ltd

0.41%

0.47%

2.38%

3.71%

Maple Leaf Cement Ltd

0.18%

0.04%

0.24%

0.218%

Fauji cement

1.15%

0.86%

0.89%

0.10%

Lucky Cement Ltd

2.45%

0.004%

0.060%

0.005%

This ratio shows the capability of Cement Industries to generate income with its assets. The high value of AU indicates the more productivity of inddustries. Attock cement showed an upward trend and increased from 0.41% in 2007 to 3.71% in 2010, Maple leaf cement shows AU upward trend from 0.18% in 2007 to 0.218% in 2010 however Lucky cement Limited AU is also decrease in 2007 to 2008 but in 2009 remained below as comparability to 2010, Fauji cement is also shows decreasing trend from 1.15% in 2007 to .10% in 2010%. This result indicates that is doing relatively better in terms of trend than factory. However, than that of other Islamic banks. 5% level of significance, statistically difference from average AU ratio of Cement industries.

INCOME TO EXPENSES (IER)

Total Income / Operating Expenses

Income to expense is the ratio that measures amount of income earned per dollar of operating expense. This is the most commonly and widely used ratio in the industries sector to assess the managerial efficiency in generating total income vis-à-vis controlling its operating expenses. High IER is preferred over lower one as this indicates the ability and efficiency of the industry in generating more total income in comparison to its total operating expenses. Total income in the study is defined as net spread earned before provisions plus all other income while the Other Expenses in the income statement are treated as total operating expense for the study.

Income to Expenses

2007

2008

2009

2010

Mean

Atctok Cement Ltd

26.3%

50.765

112.9%

253.9%

Maple Leaf Cement Ltd

235.3%

425.4%

146.15%

35.9%

Fauji cement

127%

313%

247%

106%

Lucky Cement Ltd

442%

.20%

2.81%

.74%

Figure show the behavior of income to expense ratio for allCement industries. The results show that IER of Attock cement is higher than that of other Factory during the 4-year period, which proves that Attock cement is more efficient in managing their expenses; however that Factory high IER but it up and down trend year to year.

However, the results also show that since 2007 this ratio is decreasing for Attock cement while it is on the increasing trend forother factory. Further analysis of financial statement reveals that the decreasing trend is due to increase in expenses and decrease in income of some factory in the four Cement industries, and for IER to increase since 2010 is Attcok cement is due to increase in income which is more than increase in expenses, causing the IER to rise.

Operating Expences

Operating Expenses / Operating Income

Unlike IER, which measures the amount of income earned per dollar of operating expense, OE is the ratio that measures the amount of operating expense per dollar of operating revenue. It measures managerial efficiency in generating operating revenues and controlling its operating expenses. In other words, how efficient is the cement industry in its operations. Lower OE is preferred over higher OE as lower OE indicates that operating expenses are lower than operating revenues. Operating revenue in this study is defined as net spread earned before provisions plus fee, brokerage, commission, and forex income. Other expenses is defined same as we defined in the previous ratio.

The results of operating expenses to operatong income ratio conform to our results of OE. The results show that Op of the Lucky Cement industry is higher than all other Cement industries. Lucky Cement shows upward trend 0.23time in 2007 and 135.5time in 2010,Howover the Fauji Cement shows result 0.79in 2007 and decrease in 0.31 in 2008 but in 2009 and 2010 upward trend.Maple Leaf is also shows downward trend 0.43 in 2007 to 2.78 in 2010, Attock Cement shows downward trend 3.8 in 2007 and 0.39 in 2010.

Operating expances

2007

2008

2009

2010

Mean

Atctok Cement Ltd

3.8

1.97

.88

0.39

Maple Leaf Cement Ltd

0.43

0.24

0.68

2.78

Fauji cement

.79

0.31

0.41

0.93

Lucky Cement Ltd

0.23

498.6

35.6

135.5


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